SEC needs to CRACK DOWN on "Prop" firms

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Quote from chewbacca:

you misunderstood me.....the real prop firms like the gs prop division are indeed true prop.....and retail props shouldn't be able to falsely advertise themselves are true prop......as far as my comment on the 1-2k risk capital......i mean that a firm brings in a new trader without capital contribution and gives him lets say 100k bp to start off but makes it clear that the DD cannot exceed 2k......so the amount of capital truely at risk is 2k.....then as the trader proves himself.....bp and all the rest go up as he develops......but if they can't even afford that then its a purely retail shop and they shouldn't be able to market themselves on monster.com as prop.
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OK, let me try to clarify myself better too. I don't know if you trade prop, but I have traded at 4 different prop firms and now run a prop office myself. You have no idea how fast guys can lose money. When you talk about losing 1k to 2k and then cutting a guy off, you need to understand that a trader can lose that in 4 days. No firm is going to go through the headache involved in licensing a guy, getting his U-4 processed, processing all his paperwork, setting up a workstation for him, only to watch him blowout in 3 days. Even if you trade small, it's not hard to lose 400 to 500 a day after fees.

When I started trading in NY for Worldco, I was given a limit a limit of 100 shares of stock and two positions. I lost about 300 to 500 a day for 6 months until I went profitable. I had guys next to me go 30k to 50k in the hole trading 100 to 500 share positions.

The bottom line is, a guy can go through 5k to 10k very fast. If a firm cuts a guy off after losing 5k to 10k, most traders would be out the door in less then 30 days. There is no way around this. It takes a very long time for a trader to become a profitable. And most of the guys that have no capital to put up are not profitable traders.

There are some realities in this business that a lot of traders refuse to face. Unfortunately I have to face them and deal with them every day. The sad unfortunate truth is that 90% of traders lose money. The 10% that make money are usually very well capitalized. That means close to 100% of undercapitalized guys lose money. I know the numbers as I see them in my firm and other firms. Anyone that refuses to acknowledge this is living on fantasy island.
 
Quote from pairsarb:

you know, not all prop firms are bad. I joined one and the president gave me a $30K leash. Guess what, I lost every penny of it, in three months. This was after a successful 3 years trading merger arb, with a salary and bonus, etc. Okay...so three or 4 years being a good trader, then a crappy few months, and now I trade on the smallest account ever, with a mere $100K buying power, and my firm hates me cuase I trade low volume. That is one thing I hate but it's the reality at a firm that gives you free leverage, they gotta make their money off commish override on you. Data etc also costs money. It's a business, and you gotta take care of all the people involved. I don't do it anymore but sometimes I would put on trades with the goal of scratching for volume. At the end of the month, sometimes that makes a difference in rebate or even if it just makes one's manager happy. It's part of the job.

So while I struggle now, I don't agree that all prop firms are bad. One took a risk and trained me and made plenty of money, another took a risk and lost. Right now I have low confidence and low capital. This is probably the toughest point in my career, but i won't blame the structure of a firm. I believe that at the end of the day, I create my results, and the largest factor of my results is..well...my own trading, not the particular firm I am with.

No prop firm has every absconded (with) my money or failed to pay me when due. I feel bad for those that that has happened too, however, if you are a good trader you can start again and make the money if you trade well.
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I think it's great that you're taking responsibility for your results at the toughest point in your career and you make some good points. This is the character of a good trader. Not all prop firms are bad, most are good, but some are mismanaged and eventually get blown out, and some are fly-by-night operations. I don't think traders (even the best ones) who lost deposits as a result of dishonest prop firms would agree with you that

"if you are a good trader you can start again and make the money if you trade well. "

Nobody likes to get robbed or taken advantage of. There's enough "natural" odds stacked against a trader's success, that he doesn't need additional avoidable factors to be stacked against him.
 
Quote from Maverick74:



There are some realities in this business that a lot of traders refuse to face. Unfortunately I have to face them and deal with them every day. The sad unfortunate truth is that 90% of traders lose money. The 10% that make money are usually very well capitalized. That means close to 100% of undercapitalized guys lose money. I know the numbers as I see them in my firm and other firms. Anyone that refuses to acknowledge this is living on fantasy island.
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Again, Mav has good points here. BP alone cannot make a good trader, but without it you cannot participate in the current "working" strategies, as I see it. Firms that bring on traders with $5k or something are doing a giganitic dis-service IMO. It takes some time, and usually a financial learning curve, before one starts to be profitable. Remember, "lack of capital" is the primary reason most business ventures fail. It is two fold in our industry, the trader needs some "cushion" and the Firm needs to provide $mil or two so they can trade properly.

(I know it seems that Mav and I are bias, and we probably are to a point, but what many of you don't realize is that we have been on both sides of the fence, and actually still are....I pay GS the exact same as my highest volume traders).

Don
 
Quote from pairsarb:

....Most newer firms are run by inexperienced guys (maybe not inexperienced traders but perhaps inexperienced managers) and when the shit hits the fan, everyone loses. Somteims the guys who you think are screwing you are in a much worse position than you think.....
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I'm not a prop manager and I don't know why prop firms fail (the legit ones that is). If they sometimes fail because inexperienced managers take too much risk (ie overleverage certain traders), then maybe regulation can help there too, by setting limits on the distribution of risk within the firm. If they fail because they are undercapitalized, maybe more regulation is needed so that not "anyone" can open up a prop firm. In an ideal parallel universe, if I had a choice between a "regulated" prop firm and an "unregulated" one, I would go with the regulated one, even though I might have to adhere to those risk limits too, just like everyone else, wouldnt you?

Why have prop firms failed in the past? Was it overleveraging some traders? Was it margins too thin?..Can regulation help prevent this from happening? Would be nice if some of the prop managers on here can coach us through this because they would know best why prop firms fail in the first place
 
Quote from giggollo:

Why have prop firms failed in the past? Was it overleveraging some traders? Was it margins too thin?..Can regulation help prevent this from happening? Would be nice if some of the prop managers on here can coach us through this because they would know best why prop firms fail in the first place
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Most of the "prop" firm failures were due to not understanding the business for the most part. Many of these firms thought that they could get into the "multi-level marketing" business by joining another firm, setting up a "sub-llc" acting only as an "introducing broker" for another firm, acting like a "middleman". Ever since the commish rates hit rock bottom, there is no room for "sub-llc's" any longer (for the most part, of course there are some exceptions...hold your "cards and letters").

One of the biggest "blew up" because the "owner" blew a few $million of his and the traders money. Mav can explain another, WorldCo if he wants to...not exactly a "blow up" more like a "melt down" IMO. Generic/Carlin has always been strong and has been around as long as we have (maybe longer). A couple of others were "absorbed" - by Clearing firms or Merrill.

Thus, my same ole mantra that Mav loves to see check the balance sheets, check the Broker Dealer history (if they are, in fact a broker dealer, if not, re-think joining), "do the due" diligence, as you would with any business venture.

Don

Don
 
Quote from Steve Tvardek:

I have 1 Mil BP w/ 5K down BUT.....500k is "soft" BP which is for orders only. In essence I have 500K thats executable (which I never use all up anyways).

Most guys cant get this leverage unless, like Bit said, they prove themselves and the firm feels comfortable with them. I dont do overnights; if I did, I would get no where near the leverage I have for intraday.
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you must have proved yourself to get that kind of leverage, i would be leary of any llc that gave a new guy 1 mill on 5000 unless they have a good system in place to keep him from blowing other folks up, I've seen 10,20-50 to 1 but 200 to one for new guys is pretty scary, who is offering that kind of leverage that you trust

anybody know?
 
The question is asked, why do prop firms blow up. The truth is, they don't. What actually happens is not so different from let's say a local restaurant. One day the owner looks over his balance sheets and notices he is not making any money anymore. And before you know it, you see a closed sign on the door.

What happened at Worldco was very similar. The firm never blew up. There was no rogue traders. When bullets went away and commission rates got too low, the owners looked over the numbers and decided it was time to call it a day. This is what happens to 90% of the prop firms that go under. The margins get squeezed. You have guys going debit into your cash. The good traders that are producing will leave unless you cut their commissions to almost zero. And the new guys are hardly trading and are not generating revenue. It's really a vicious game.

So when you guys talk about firms blowing up, you need to understand what is really happening. They are not blowing up, they are shutting down. There is a difference.
 
Quote from Maverick74:

So when you guys talk about firms blowing up, you need to understand what is really happening. They are not blowing up, they are shutting down. There is a difference.
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This is a pretty interesting point, which I don't see mentioned often.
I have seen several outfits though, usually run by former Worldco guys, pop up and disappear. Most of the time they clear through the standard big few prop firms but their claimed added value is to get cheaper commissions than standard and extra leverage, or "training." I think these are the groups that ruin the reputation of the prop industry at large -- and more than a few times I have heard about them running with deposits.

I'm curious to see what happens with HLV, for instance, as that's one of the more recent larger ones that looked like it could have had an okay start, but is now showing all the same signs.
 
Quote from stereo70:

Don Bright wrote:

Firms that bring on traderswith $5k or something are doing a giganitic dis-service IMO


You've had deals like this in the past.
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Yes, we have...trying to offer an alternative, but after seeing the results, we just don't do it any longer.

Don
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